Debt Consolidation V/S Debt Settlement

Debt Consolidation V/S Debt Settlement

For those who are already buried under tons of debt, the methods of cutting down or restructuring debt can seem to be extremely confusing. Especially when you take into consideration debt consolidation and debt settlement, two very similar concepts that tend to confuse people to no end. In the end, what matters to all is a method to reduce debt.

The main difference between the two is that debt consolidation aims to reduce the overall number of creditors while debt settlement aims to reduce the amount of debt owed. Apart from this major difference, there are a number of other subtle differences.

Debt Consolidation

In debt consolidation, borrowers have to take out a new loan in order to pay off any existing loans or bills. Debt consolidation companies often make use of personal loans or home equity loans to combine all separate loans into one. The new loan will most likely have a lower interest rate but will most probably have longer loan terms. In other words, that while this debt consolidation loan will cost less on a monthly basis, the overall amount paid will be more as borrowers will pay greater interest.

Debt Settlement

In debt settlement, the whole financial liability is reorganized and is paid in one lump sum. While it is possible to get debt settlement without assistance, it’s is best to avail assistance from credit counselors. Credit counselors will negotiate with creditors on your behalf and will try to reach an amicable agreement on the amount owed. Once a settlement has been reached and a written agreement signed, the borrower then pays of the reduced debt amount in one lump sum. The reason why it is a good idea to hire professionals is because they have plenty of experience in dealing with creditors and understand the intricate details of the whole process.

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